Assistant Commissioner of Income-tax, V. Shri Paresh P. Mehta, Pune

ITA 1903/PUN/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1156 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 01-09-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 24-10-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: HITENDRA NINAVE
• Assessee Lawyers: S K TYAGI
• Keywords: Business income; Earning of tax free income
• Section: 14A

Judgement Text

] IQ.KS ] IQ.KS ] IQ.KS ] IQ.KS IQ.KS IQ.KSIQ.KS IQ.KS IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . . , , ' # BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1903/PN/2013 '% % / ASSESSMENT YEAR : 2010-11 ACIT, CIRCLE-2, PUNE . / APPELLANT V/S SHRI PARESH P. MEHTA, 401, WOOD CREST, 27/A, GIDNEY PARK, SALISBURY PARK, PUNE 411037 PAN NO.ACDPM3218P . / RESPONDENT / ASSESSEE BY : SHRI S.K.TYAGI / DEPARTMENT BY : SHRI HITENDRA NINAVE / ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE OR DER DATED 22-05-2013 OF THE CIT(A)-II, PUNE RELATING TO ASS ESSMENT YEAR 2010-11. 2. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER : (1) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN ALLOWING RS.75,51 ,867/-. / DATE OF HEARING :01.09.2015 / DATE OF PRONOUNCEMENT:04.09.2015 2 ITA NO.1903/PN/2013 (2) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) E RRED IN NOT CONSIDERING THAT THE ASSESSEE WAS NOT MAINTAINING SEPARATE BOOKS OF ACCOUNT AND THAT ITS ENTIRE BUSINESS OPERATIONS, INCLUD ING BUSINESS WHICH YIELDED EXEMPT INCOME, WERE RUN WITH COMMON POOL OF FUNDS NECESSITATING INVOKING OF RULE 80 OF INCOME TAX RULES, 1962 TO DETERMINE EXPENDITURE ATTRIBUTABLE TO EARNING OF EXEMPT INCOM E. (3) THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) E RRED IN NOT APPRECIATING THAT THE INTEREST OF RS.99.69 LAKHS COULD NOT BE SAID TO HAVE BEEN INCURRED ONLY FOR EARNING THE TAXABLE INCOME A ND NOT EXEMPT INCOME AND AS SUCH, THE ASSESSEE HAD INCURRED INTEREST EXPENDITUR E & OTHER ADMINISTRATIVE EXPENSES FOR THE PURPOSE OF EARNING EXE MPT INCOME, THEREBY JUSTIFYING THE INVOKING OF PROVISIONS OF SECTIO N 14A OF THE ACT. (4) THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY OR ALL THE GROUNDS OF APPEAL. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A N INDIVIDUAL ENGAGED IN THE BUSINESS OF TRADING IN SHARES. HE FILED HIS R ETURN OF INCOME ON 25-09-2010 DECLARING TOTAL INCOME OF RS.51,64,250/ -. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOT ED THAT ASSESSEE HAS CLAIMED EXEMPT INCOME OF RS.9,74,769/- BEING INCOME ON ACCOUNT OF DIVIDEND. FROM THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING 31-03-2009 HE NOTED THAT THE ASSESSEE HAS CLAIM ED INTEREST EXPENDITURE OF RS.99,69,411/-. HE, THEREFORE, ASKED THE ASS ESSEE TO SUBSTANTIATE AS TO WHY PROVISIONS OF SECTION 14A WILL NOT B E APPLICABLE SINCE THE ASSESSEE WAS IN RECEIPT OF EXEMPT INCOME. IT WAS SUBMITTED THAT THE INCOME FROM DIVIDEND IS PURELY INCIDENTAL TO THE B USINESS OF THE ASSESSEE. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRADING IN SHARES AND HAS NOT PURCHASED ANY SHARES FOR THE PURP OSE OF EARNING DIVIDEND. ALL THE SHARES ARE HELD AS STOCK IN TRADE. NO E XPENDITURE HAS BEEN INCURRED FOR EARNING THE DIVIDEND INCOME. RELYIN G ON THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CC I LTD. VS. JCIT REPORTED IN 71 DTR 141 IT WAS ARGUED THAT NO DISA LLOWANCE U/S.14A OF THE I.T. ACT IS PERMISSIBLE WHERE THE INCOME FROM DIVIDEND IS INCIDENTAL TO THE BUSINESS OF TRADING IN SHARES. 3 ITA NO.1903/PN/2013 4. HOWEVER, THE AO WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE. ACCORDING TO HIM, THE ASSESSEE IS NOT MAIN TAINING SEPARATE BOOKS OF ACCOUNTS FOR ITS BUSINESS WHICH IS YIELDIN G EXEMPT INCOME AND FOR ITS BUSINESS WHICH IS YIELDING TAXABLE INCOME. THE ASSESSEE IS HAVING COMMON POOL OF FUNDS FOR ITS ENTIRE BUS INESS OPERATIONS INCLUDING THE BUSINESS WHICH IS YIELDING EXEMPT IN COME, THEREFORE, THE EXPENDITURE ATTRIBUTABLE TO EARNING OF EXEM PT INCOME CAN ONLY BE REASONABLY DETERMINED BY INVOKING RULE 8D. SINCE THE DIVIDEND IS EXEMPT FROM TAX, EXPENDITURE INCURRED TO INVEST IN SHARES IS NOT ALLOWABLE AS DEDUCTION, EVEN IF ASSESSEE IS ENGAGED IN THE BUSINESS OF TRADING IN SHARES. HE OBSERVED THAT ASSESSE E HAS AN INVESTIBLE CAPITAL OF RS.1.51 CRORES AND THE TURNOVER IN SHA RES IS RS.24 CRORES AND THE CLOSING STOCK AS ON 31-03-2010 IS RS.14 .16 CRORES. THE ASSESSEE HAS INVESTIBLE SURPLUS OF ONLY RS.1.51 CRORES AND THE BALANCE IS OUT OF INTEREST BEARING UNSECURED LOAN. CONSIDERING THE TOTAL EXPENDITURE OF RS.99.66 LAKHS FOR THE IMPUGNED ASSESSMENT YEAR THE AO DISALLOWED AN AMOUNT OF RS.75,51,867/- U/S.14A R.W. RULE 8D. 5. IN APPEAL THE LD.CIT(A) RELYING ON VARIOUS DECISIONS HE LD THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRADING IN SHARES AND HAS NOT PURCHASED ANY SHARES FOR THE PURPOSE OF INVESTMENT AND THE SHARES ARE HELD AS STOCK IN TRADE AND THE DIVIDEND INCOME BY TH E ASSESSEE IS ONLY INCIDENTAL TO THE BUSINESS OF TRADING IN SHARES, THERE FORE, NO DISALLOWANCE U/S.14A IS CALLED FOR. 6. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 7. THE LD. DEPARTMENTAL REPRESENTATIVE HEAVILY RELIED ON THE ORDER OF THE AO. HE ALSO RELIED ON THE DECISION OF THE MUMBAI BE NCH OF THE 4 ITA NO.1903/PN/2013 TRIBUNAL IN THE CASE OF D.H. SECURITIES PVT. LTD. VS. DCIT REP ORTED IN 41 TAXMANN.COM 352 ACCORDING TO WHICH DISALLOWANCE U/S.14 A CAN BE MADE EVEN IN CASES WHERE DIVIDEND INCOME HAS BEEN EARNE D ON SHARES HELD AS STOCK IN TRADE. 8. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAND APART FROM RELYING ON THE ORDER OF THE CIT(A) REFERRED TO THE DECISIO N OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF KUNAL POLYMERS VS. DC IT VIDE ITA NO.1859/PN/2012 ORDER DATED 15-07-2015 AND SUBMITTED THAT THE TRIBUNAL AFTER CONSIDERING THE DECISION OF HONBLE BOMBAY HIG H COURT IN THE CASE OF DCIT VS. M/S. INDIA ADVANTAGE SECURITIES LT D. HAS HELD THAT NO DISALLOWANCE U/S.14A R.W. RULE 8D CAN BE MADE ON DIVIDEND INCOME ON SHARES WHICH ARE HELD AS STOCK IN TRADE. HE A CCORDINGLY SUBMITTED THAT THIS BEING A COVERED MATTER IN FAVOUR OF T HE ASSESSEE THE GROUNDS RAISED BY THE REVENUE SHOULD BE DISMISSED. 9. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOT H THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIO US DECISIONS CITED BEFORE US. THERE IS NO DISPUTE TO THE FACT THAT ASS ESSEE IN THE INSTANT CASE IS ENGAGED IN THE BUSINESS OF SHARE TRADING. THE DIVIDEND INCOME HAS BEEN EARNED ON SHARES WHICH ARE HELD AS STO CK IN TRADE. ACCORDING TO THE AO THE PROVISIONS OF SECTION 14A R.W. RULE 8D ARE APPLICABLE ON EXEMPTED DIVIDEND INCOME ON SHARES EVEN IF TH EY ARE HELD AS STOCK IN TRADE. HE ACCORDINGLY DISALLOWED AN AMOUN T OF RS.75,51,867/- U/S.14A R.W. RULE 8D. WE FIND THE LD.CIT(A) DELE TED THE ADDITION ON THE GROUND THAT PROVISIONS OF SECTION 14A R.W.RULE 8D ARE NOT APPLICABLE TO DIVIDEND INCOME ON SHARES HELD AS STOCK IN TRADE. 5 ITA NO.1903/PN/2013 10. WE FIND AN IDENTICAL ISSUE HAD COME UP BEFORE THIS BENC H OF THE TRIBUNAL IN THE CASE OF KUNAL POLYMERS PVT. LTD. (SUPRA) TO WHICH BOTH OF US ARE PARTIES. IN THAT CASE ALSO, THE AO HAD MADE D ISALLOWANCE U/S.14A ON DIVIDEND RECEIVED ON SHARES HELD AS STOCK IN T RADE WHICH WAS UPHELD BY THE CIT(A). ON FURTHER APPEAL BY THE ASSESS EE THE TRIBUNAL DELETED THE ADDITION BY OBSERVING AS UNDER : 10. THE FIFTH GROUND RAISED IN THE APPEAL BY THE ASS ESSEE IS WITH RESPECT TO DISALLOWANCE MADE U/S. 14A R.W. RULE 8D ON SHARES HE LD AS STOCK-IN- TRADE. THE ASSESSEE HAS OFFERED DIVIDEND INCOME FROM TH E SHARES HELD AS STOCK-IN-TRADE AS BUSINESS INCOME. THE TREATMENT GIVEN BY THE ASSESSEE TO THE DIVIDEND INCOME IS AGAINST THE PROVISIONS OF SECTION 10(23F). THE DIVIDEND INCOME HAS BEEN SPECIFICALLY EXCLUDED IN THE ACT, THUS, IT DOES NOT FORM PART OF TOTAL INCOME. THE QUESTION BEFORE US IS : WHETHER DISALLOWANCE U/S. 14A IS TO BE MADE ON DIVIDE ND RECEIVED ON SHARES HELD AS STOCK IN TRADE? IT IS AN UNDISPUTED FACT THAT THE SHARES ARE HELD BY T HE ASSESSEE AS STOCK-IN-TRADE. THE ASSESSEE HAS EARNED DIVIDEND INCOME ON SUCH SHARES. THE ASSESSEE HAS NOT HELD THE SHARES FOR EARNING DIVIDEND INCOME. DIVIDEND INCOME IS INCIDENTAL TO THE SHARE TRADING BU SINESS OF THE ASSESSEE. THUS, NO DISALLOWANCE U/S. 14A IS WARRANTED ON D IVIDEND EARNED ON SHARES HELD AS STOCK-IN-TRADE. OUR VIEW IS FORTIFIED BY THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN ITA NO. 6711/MUM/20 11 IN THE CASE OF DCIT VS. M/S. INDIA ADVANTAGE SECURITIES LTD. FOR THE ASSESSMENT YEAR 2008-09 DECIDED ON 14-09-2012. IN THE SAID CASE, THE ASSESSEE HAD RECEIVED DIVIDEND INCOME OF RS.1,40,859/- ON SHARES SHO WN AS STOCK-IN- TRADE IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. THE ASSESSE E HAD NOT MADE ANY DISALLOWANCE OF EXPENSES RELATING TO EXEMPT INCOME . THE ASSESSING OFFICER MADE DISALLOWANCE U/S. 14A R.W. RULE 8D. THE COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT DISALLOWANCE UNDER RUL E 8D COULD BE MADE ONLY WITH RESPECT TO INVESTMENT AND NOT IN STOCK- IN-TRADE. THE REVENUE PREFERRED APPEAL BEFORE THE TRIBUNAL AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS). THE TRIBUNAL BY PLACING RELIANCE ON THE JUDGMENT OF HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD. VS. JCIT REPORTED AS 250 CTR 291 HELD THAT NO DISALLOWANC E U/S. 14A IS TO BE MADE IN RELATION TO SHARES HELD AS STOCK-IN-TRADE. THE ORDER OF THE TRIBUNAL WAS CHALLENGED BY THE DEPA RTMENT BEFORE THE HON'BLE BOMBAY HIGH COURT IN INCOME TAX APPEAL NO. 1131 OF 2013. THE HON'BLE HIGH COURT DISMISSED THE APPEAL OF THE REV ENUE VIDE ORDER DATED APRIL 13, 2015 THUS, CONFIRMING THE FINDINGS OF THE TRIBUNAL. IN VIEW OF THE FACT THAT THE HON'BLE JURISDICTIONAL HIGH COU RT HAS UPHELD THE VIEW TAKEN BY THE TRIBUNAL THAT PROVISIONS OF SECTION 14A R .W. RULE 8D WOULD NOT APPLY ON THE SHARES HELD AS STOCK-IN-TRADE, THE DISA LLOWANCE U/S. 14A IN THE PRESENT CASE WOULD NOT SUSTAIN. ACCORDINGLY, WE ACCEPT THIS GROUND OF APPEAL OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE DISALLOWANCE MADE U/S. 14A OF THE ACT. 6 ITA NO.1903/PN/2013 11. IN VIEW OF OUR DECISION CITED (SUPRA) WE HOLD THAT NO DISALLOWANCE U/S.14A R.W. RULE 8D CAN BE MADE ON DIVIDEND IN COME FROM SHARES HELD AS STOCK IN TRADE. WE ACCORDINGLY UPHOLD THE ORD ER OF THE CIT(A) AND THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 12. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 04-09-2015. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) ' / JUDICIAL MEMBER / ACCOUNTANT MEMBER IQ.KS PUNE ; # DATED : 04 TH SEPTEMBER, 2015. LRH'K ( )'+ , / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ( ) S / THE CIT(A)-II, PUNE 4. ( S / THE CIT- II , PUNE 5. 6. + ., ., IQ.KS / DR, ITAT, B PUNE; / GUARD FILE. / BY ORDER , + //TRUE C + //TRUE COPY// 2 . / SR. PRIVATE SECRETARY ., IQ.KS / ITAT, PUNE